Economist, Telegraph Columnist, Broadcaster

Britain’s shaky growth is papering over the cracks

The latest growth numbers are good news. The UK economy expanded by 0.7pc during the final three months of last year, with national output up a respectable 1.9pc for 2013 as a whole.

Britain has now grown for four successive quarters, we learnt on Tuesday, with GDP rising at its fastest annual rate since 20007. Comparing the fourth quarter of 2013 to the same period in 2012, in fact, the UK grew no less than 2.8pc. Crikey! Britain is booming!

Such numbers do indeed suggest the credit crunch is over and we’re headed for the sunlit economic uplands. No wonder, with the UK growing faster than almost any other developed nation, that British politics has shifted – with some now predicting a Tory majority in the Commons, despite the efforts of the Parliamentary party to tear itself to pieces.

While growth is welcome, though, we should be cautious. Beyond the headlines, the GDP fineprint isn’t good. For one thing, the UK’s recovery remains extremely imbalanced. Over half this fourth quarter growth was driven by financial and business services, including real estate. Not only are such activities overwhelmingly London-centric, but a bloated financial sector and an over-heated housing market were the reason we got in this mess in the first place.

Manufacturing, meanwhile, grew just 0.1pc from October to December and, despite the screaming need for the UK to expand its housing stock, the construction sector actually contracted by 0.3pc.

The US economy is now 7pc bigger in real terms that at the time of the 2008 collapse. German GDP is 3pc above its pre-crisis peak. It’s fun to goad the French for their moronic recent tax rises and philandering President, but France has fully recovered too, its national income now back to where it was before this ghastly sub-prime crisis.

The UK, though, uniquely among the world’s big economies and despite our latest growth spurt, has yet to make up lost ground. Over five years on from the credit crunch, our economic output remains 1.3pc below 2008 levels, with manufacturing 8.2pc lower and construction output, incredibly, still 11.2pc adrift. So our recovery is far from balanced – and with financial services and real estate roaring, while manufacturing and construction languish, the imbalance is getting worse.

Yes, I know that some growth is better than no growth, but it’s important, amidst the slew of triumphalist headlines, to highlight some home truths. The combination of low productivity and stubbornly high inflation has hammered UK wages. Since 2008, take-home pay has dropped by a staggering 1.2pc a year in real terms, compared to a 0.6pc annual increase in Germany.

I, too, think that Ed Balls’ “flat-lining” gesture is annoying, but in terms of living standards, the Shadow Chancellor is right. We’ve suffered the longest drop in living standards for 50 years, the respected Institute for Fiscal Studies has just confirmed, and real wages are still going down.

Another home truth is that, despite a 20pc decline in the trade-weighted value of sterling since 2009, the UK’s shortfall of exports to imports has widened. Over the last four years, our current account deficit has ballooned from 1pc of national income to 3.7pc. While this is a long-term problem – Britain, disgracefully, has run an external deficit for 31 years in a row – trade continues to act as a net drag on our economy, despite a weaker currency.

The underlying problem is that this UK recovery, like so many during my lifetime, is being built on debt-fuelled consumption, which sucks in endless imports, rather than on investment, which in turn brings productivity gains, competitively-priced output and, ultimately sustainable growth.

In “After Osbrown”, an important new pamphlet from Politeia, the free-thinking Tory backbencher Douglas Carswell makes the point that each of the four periods of sustained economic contraction experienced by the UK since the early 1970s has been preceded by an unsustainable credit-induced boom which then went wrong

We’re now making the same mistake all over again, argues Carswell, with the Tory-led coalition, for all its “austerity” rhetoric, following the same road of high government borrowing and excessive credit stimulation that Labour took under Gordon Brown. “We test to destruction the idea that cheap credit can make us rich,” writes Carswell. “Sooner or later, Osbrown economics will not only fail, but will be recognized as having failed”.

Carswell is no lightweight, backbench malcontent but an increasingly influential voice both inside and outside Parliament. There is, to my mind, a great deal in what he says. The recent slew of data, despite the rosy headlines, does suggest this is an unbalanced, unsustainable debt-fuelled upswing. Along with our deteriorating current account, consider that UK household debt just reached a record £1,430bn, higher than it was prior to the credit crunch. Yes, car sales have grown over the last few years, but three-quarters of them were financed with borrowed money.

The bank lending numbers are alarming too. While mortgage lending has risen sharply, so juicing-up the housing market, net lending to businesses fell $4.3bn from September to November. Data for December, released last week, shows banks handing out mortgages at the fastest pace since January 2008, while businesses lending continues to contract, with our vital, employment-intensive small- and medium-sized business bearing the brunt of the reduction.

The UK’s loss-hiding, zombiefied and largely unreformed banking sector, while happily stoking another housing bubble, is still failing to channel capital to creditworthy business and, as a result, is preventing a meaningful recovery. This lack of finance is a major reason why, between 2009 and 2012, UK investment averaged just 14pc of GDP, a multi-decade low, compared to 18pc in Germany, 19pc in America and 20pc in France. This reality is seriously undermining our economy, blocking the path to future prosperity.

I’m not only cautious about these recent growth numbers, welcome as they are. I’m actually rather concerned. Why? Because aside from issues related to consumer-focused credit and low investment, there are actually some rather nasty economic clouds on the horizon that could easily whip up a storm, blowing away our nascent recovery.

The US Federal Reserve is now in the midst of reining in its $85bn-a-month money printing habit, slowing down the virtual printing presses to $75bn and then $65bn monthly. Having inflated a massive credit bubble, the Fed’s actions could easily cause havoc on global financial markets. Already, nerves are fraying as Western investors, keen to benefit from a strengthening dollar, pull money out of emerging markets, causing these nascent economies to lurch.

Over the last five years, the US central bank has conducted quantitative easing of $3,200bn, with the Fed tripling its balance sheet. The UK’s £375bn of QE has been, proportionately, bigger still. Much of this money has found its way into shares and other financial assets, pumping up global markets to unsustainable highs. The danger is that the Fed’s “tapering” of QE, the undeniable sign the monetary steroids are ending, could spark a nasty correction.

The most eye-catching data I’ve seen recently was the Baltic Dry Index. Measuring the cost of moving major raw materials by sea, and closely linked to global commodity demand, BDI has long been an important lead indicator of global growth, with sharp dips historically predicting trouble on financial markets.

Since the end of December, the BDI has plunged no less than 50pc, the worst slide since mid-2008 and the biggest January dip in more than 30 years. So, yes, I’m glad the UK economy is now growing. But only a fool would argue this recovery is secure.